What is IRR?

IRR (Internal Rate of Return) is an effective way to evaluate the year over year performance of an investment, or portfolio of investments, and is commonly used in the private equity field. It factors in cash outflows (investments, investment fees) and cash inflows (divestments, dividends, distributions interest, repayment of loans) over time to determine a time-weighted return on investment. The higher the IRR, the better the investment.

More precisely, IRR refers to the annual rate of return that makes the net present value of all cash flows (both positive and negative) from an investment equal to zero. It can also be defined as the discount rate at which the present value of all future cash flow is equal to the initial investment or, in other words, the rate at which an investment breaks even.